Denmark, the country with the longest history of negative central bank rates is offering homeowners 20-year loans at a fixed interest rate of zero. This is very similar to the zero percent financing on cars in the US except you are buying a house. What does this mean for long term US rates? How will this impact real estate?
What happened?
Denmark stands out in a global context as the country to have lived with negative central bank rates longer than any other. Back in 2012, policy makers drove their main rate below zero to defend the krone’s peg to the euro. Since then, Danish homeowners have enjoyed continuous slides in borrowing costs with the recent zero percent rates. Essentially Danish homeowners can borrower money for free!
What does this mean for future inflation and in turn mortgage rates?
Ironically, there was record demand for the bonds backed by the zero percent rates and pricing was at historic highs which means the market “wants” this product. By buying mortgage bonds with a zero percent rate, the market is projecting that future inflation will be close to zero. Why? Nobody would buy the bonds if there was the expectation for future inflation as their returns would quickly turn negative.
Furthermore by buying the bonds, the market is also projecting that future growth will be muted and as a result they are focusing on safe havens with no growth but preservation of capital.
What does the world bank think about future growth?
According to the World Bank, “If history is any guide, unless there is substantial reform, we think the global economy is headed for a decade of disappointing growth outcomes”
Before the pandemic, the bank projected that potential global growth between 2020 and 2029 would slow to a yearly average of 2.1%, from 2.5% in the previous decade, as a result of aging populations and lower productivity growth. On Tuesday the bank lowered its projection to 1.9%. Potential output assumes the world economy is operating at full employment and capacity.
The World Bank said the global economy is expected to grow 4% this year after contracting 4.3% in 2020. That 2021 projection is 0.2 percentage point lower than it forecast last June, reflecting the resurgence of the coronavirus and renewed restrictions on economic activity.
What does this mean for real estate?
Denmark is not an anomaly and will alter worldwide rates. The markets are giving clear indications that we are in a long-term era of low rates. As Europe and other advanced economies have rock bottom rates, this will increase demand for positive rates in places like the United states. This increased demand will be one of the drivers of low interest rates in the United States.
Even though we will likely see a jump in demand over the next year or so, the long term trends are pointing to a much slower growth environment. The slower growth will eventually taper demand for real estate.
Not all good news
Low rates are not all good news. Unfortunately rock bottom rates are bad for banks, for pensions, insurance companies, retirement funds, etc.. This will lead to lower spending for people who rely on these items, higher taxes to compensate for the lower rates to fund pensions, and lower returns for banks. This will further perpetuate the low growth story over the long term.
Summary
20-year mortgage rates in Denmark are not an anomaly. They are an indication of a longer-term environment with low growth and in turn interest rates. In the short term this will spur real estate demand, but in the long term, the low growth environment will substantially taper demand.
Additional Reading/Resources
- https://www.bloomberg.com/news/articles/2021-01-05/danes-get-20-year-0-mortgages-as-interest-rates-keep-sinking?srnd=premium
- https://www.reuters.com/article/denmark-bonds/sad-milestone-as-all-danish-government-bond-yields-dip-below-zero-idUKL8N2442KU
- https://www.wsj.com/articles/covid-19-aftermath-could-spell-a-lost-decade-for-global-economy-world-bank-says-11609862404?mod=hp_lead_pos5
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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine, The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
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